AFRICA CARBON EXCHANGE CONCEPT PAPER Introduction What is Carbon Trading?

Carbon trading is a practice which is designed to reduce overall emissions of carbon dioxide, along with other greenhouse gases, by providing a regulatory and economic incentive. However, the term carbon trading is a bit misleading, as a number of greenhouse emissions can be regulated under what are known as cap and trade systems. For this reason, some people prefer the term emission trading, to emphasize the fact that far more than just carbon is being traded. This practice is part of a system which is colloquially referred to as a cap and trade. Under a cap and trade system, a government sets a national goal for total greenhouse gas emissions over a set period of time, such as a quarter or a year, and then allocates credits to companies which allow them to emit a certain amount of greenhouse gases. If a company is unable to use all of its credits, it can sell or trade those credits with a company which exceeds its allowance. Carbon trading provides a very obvious incentive for companies to improve their efficiency and reduce their greenhouse gas emissions, by turning such reductions into a physical cash benefit. In addition, it is a disincentive for being inefficient, as companies are effectively penalized for failing to meet emissions goals. In this way, regulation is accomplished largely through economic means, rather than through draconian government measures, encouraging people to engage in carbon trading because it's potentially profitable. In some countries, carbon exchanges have opened up, operating much like stock exchanges. These organizations facilitate the exchange of carbon, ensuring that they flow smoothly through the market, and they provide standard set prices for credits, based on market demand and general economic health. In some cases, individual citizens can also participate in carbon trading, purchasing credits to offset their own greenhouse gas emissions, and some advocates have suggested that carbon trading should be formally expanded to all citizens, encouraging global and individual involvement in reduction of greenhouse gas emissions.

AFRICA CARBON EXCHANGE (ACX) BACKGROUND The Africa Carbon Exchange (ACX) is an African founded and managed marketplace for environmental commodities and derivatives designed to bring the benefits of carbon markets to Africa by unraveling the complexities of carbon market participation and addressing the prevailing barriers to low carbon development in Africa. ACX will be an electronic trading platform to facilitate the trade of carbon credits and other environmental derivatives.

Headquartered in Nairobi, ACX was established in 2010 by reputable individuals and institutions, such as Carbon Asset (an independent corporate entity with a wider mandate to optimize carbon finance for Sub-Saharan African) among others. ACX is positioned to be the hub of climate change business and sustainable development in the African continent. ACX aims to provide innovative services and solutions to unlock the high potential that Africa offers to the global carbon markets. ACX will be a one-stop shop for emission reduction or sequestration projects to access the capacity, financing, and linkages required enabling low carbon development.

KEY PLAYERS IN THE CARBON BUSINESS The Kyoto Protocol has put a framework in place to reduce industrialized countries green house gas emissions through the introduction of market-based mechanisms. One of these market-based mechanisms, the Clean Development Mechanism (CDM), gives emission-reduction projects in developing countries certified emission reduction (CER) credits for each tonne of carbon dioxide (CO2) they reduce or absorb. CERs can be bought by industrialized countries to compensate for their emissions. The sale of CERs can be a significant source of revenue for Sub-Saharan African countries. But first, for a project to be considered as a CDM project, it must be approved by the Designated National Authority (DNA). The designation of a national authority for the CDM in a country is a requirement for its participation in the mechanism. In Kenya the DNA is National Environmental Management Authority (N.E.M.A) Apart from the DNA, bankers and other professionals like investment bankers, carbon brokers, renewable energy technology providers, energy efficiency experts, mass transport companies, fund managers, environment consultants, regional development authorities, hospitality industry, manufacturers, farmers and conservationists are the other key players in the carbon trading business in Kenya. Other key entities in the Kenyan economy that could have interest include Kenya Wildlife Services, Kenya Forest Service, Kenya Association of Manufacturers, KenGen, Kenya Power and Lighting Company and Kenya Rural Electrification Authority. These entities will also be formally introduced to the ACX. ACX would like to create the critical mass of players to enable full take-off for carbon trading in Kenya. This will be replicated to other African countries through regional trading blocs like East African Community (EAC), Common Market for Eastern and Southern Africa (COMESA), Economic Community of West African States (ECOWAS), etc.

PROPOSAL

As you would be aware, human induced climate change has become a prominent political, social and environmental issue, at both national and international levels. This has led to the search for regulatory solutions. Emission debate and its attendant trading mechanisms have risen in status and carbon trading has now become a favoured market based strategy to fight climate change. Carbon permits have been developed as a serious financial instrument in markets around the world turning over billions of dollars every year to mitigate against global warming. Africas share of registered projects under the Kyoto Protocols Clean Development Mechanism however is very small compared to other regions like China, India and Brazil. This has made Africa miss out on its share of benefits generated annually from carbon trade. Non-Annex I countries under the Kyoto Protocol especially European Union members and Japan have bilateral plans to support the creation of a working Clean Development Mechanism projects that benefits Africa. Currently, carbon revenue under the CDM goes mainly to China, India and Brazil. ACX was thus formed with as one of its main objective to push Africa high in the priority order. ACX will help Non-Annex I countries and other international co-operation entities in increasing the percentage of African projects in the CDM. The exchange will increase carbon literacy among institutions that do projects that qualify for carbon but do not claim the credits due to lack of awareness, lack of project development budgets and other barriers. ACX will also carry out training workshops; participants will be able to identify eligible projects at their institutions and procure the right carbon development consultancies and put them through the qualification process. This will increase the amount of CDM projects and ultimately enhance Africas chances of having an increase in sustainable economic development. This will in the long run impact African countries economies in a positive way and register Africas contribution in the war against global warming.

THE FUTURE The lack of ownership by African investors in the carbon market is one of the major constraints for the future development of this continent. This market is destined to grow, and Africa, particularly its private sector, must develop a larger presence in it. ACX beyond the workshop will roll out a full fledged training program for business executives in Kenya and Africa on carbon markets and viability of the trade for their corporate bodies. It will also be in the forefront of capacity building and raising awareness about the benefits of reducing emissions both for economic development and environmental sustainability. ACX will create linkages with key industry participant and act as a link between potential projects with the financial sector; this will act as the foundation for developing and financing of carbon projects in Africa. By boosting its participation in carbon reduction projects, Africas private sector can spur economic growth, boost energy production and reduce carbon emissions.